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Natural Gas Companies Wary of EPA involvement in Fracturing Regulation

Pipeline & Gas Journal...March 2010


The Mobil/Exxon purchase of XTO Energy has sparked new congressional interest in the environmental safety of horizontal shale gas drilling, a concern also lately exhibited by the Environmental Protection Agency (EPA) which has urged New York State to expand its analysis of the impact of shale gas drilling in the Marcellus area. A House energy & environment subcommittee held hearings on the XTO saloe on January 20 where the heads of both companies--Exxon Mobil and XTO--said they had a problem with a new piece of congressional legislation requiring natural gas producers to disclose the chemicals they use when fracturing gas deposits in shale. Both men said they had no problem making the disclosure; however, they would oppose including that disclosure requirement in the Safe Drinking Water Act, a law enforced by the EPA.
That is what the Fracturing Responsibility and Awareness of Chemicals Act (FRAC ACT) would do. It was introduced in both the House and Senate last summer. Both Rex Tillerson, Chairman and CEO, ExxonMobil Corporation and Bob R. Simpson, Chairman of the Board and Founder, XTO Energy Inc. opposed the bill. Tillerson explained he opposed EPA's involvement because "the devil is always in the details." Pressed by Rep. Diana DeGette (D-CO), one of the key sponsors, on what he meant by that, Tillerson expanded on his original statement by saying, "It means I don't know how the EPA is going to enact or implement the regulation that you are promoting in your bill." Neither the House nor the Senate has held hearings on the FRAC Act much less has a vote been taken.
The back-and-forth between DeGette and Tillerson is important because Exxon-Mobil insisted that a clause be put in the contract allowing ExxonMobil to cancel the deal if Congress passes a law making hydraulic fracturing "illegal or commercially impracticable." Neither Tillerson nor Simpson said the DeGette bill would do that; but Tillerson clearly implied that EPA regulatory involvement in hydraulic fracturing could be a problem.
Any congressional legislation seen as hamstringing new shale gas development would be a crimp in some pipeline expansions, undoubtedly. For example, Texas Eastern has announced two separate projects in anticipation of bountiful Marcellus shale gas. One expansion project could handle 300 million cubic feet of gas a day, the second 500 million cubic feet. According to Spectra Energy Corp. (which owns Texas Eastern) spokeswoman Wendy Olson, Marcellus gas would account for 80 percent of the first project's contracts and "a significant amount" in the second instance.
The production of Marcellus gas in New York State is already a red-hot political issue there.
There are only 15 shale gas wells in New York State, all of them vertical, according to Yancey Roy, spokesman for the NY Department of Environmental Conservation. That is what makes New York's draft Supplemental Generic Environmental Impact Statement (dSGEIS) for horizontal shale gas fracturing so important. It was published last September 30. The comment period closed at the end of December. Roy says the department is going through the 13,000 comments it received, some of them "ganged" signatures on single pieces of correspondence. Once the document becomes final, natural gas companies will be able to drill horizontally in Marcellus, and for the first time. The dSGEIS proposes first-time permitting conditions for horizontal hydraulic fracturing, including disclosure of liquids used.
New York City has already weighed in against drilling in sections of Marcellus containing drinking water sources for the city. Steven Lawitts, the city's top environmental official, said hydraulic fracturing represented “unacceptable threats to the unfiltered fresh water supply of 9 million New Yorkers.” Roy explains that New York City water sources account for a small portion of the Marcellus area.
Chesapeake Energy, a major producer in New York but not yet in the shale game there, complained that the dSGEIS's proposed regulatory requirements and mitigation measures "are both costly and, in some cases, unnecessarily onerous...and have left New York with relatively few producers willing to devote scarce capital to New York." However, the comments went on to say "Chesapeake is prepared to meet the extraordinarily high bar proposed in the dSGEIS."

Feds Encourage Annuities

Human Resource Executive online...March 3, 2010

The federal government's ostensible plan to begin selling annuities to both corporations and their employees through company-sponsored retirement plans has raised many concerns in the HR community.

By Stephen Barlas

The federal government seems ready to start "selling" annuity policies to American companies and their employees. The Departments of Labor and Treasury have asked for industry comment in an under-noticed "request for information" issued on Feb. 2 on how they can encourage employers to offer annuities to workers mostly with defined-contribution pension plans.

The concern -- especially after the 2008 market slide -- is that retirees are leaving the workforce with pensions that will be depleted before the end of their lives. Annuities, which both employers and employees have long turned their noses up at, are seen as a solution.

The RFI has produced some consternation in the business community, which is worried that the Obama administration might issue some sort of mandate, or de facto mandate, with regard to the inclusion of annuities in pension offerings. Kathryn Ricard, vice president for retirement policy at the ERISA Industry Committee, predicts a lot of businesses and trade association will respond to the RFI. Besides opposing any mandates, employers will argue that any new latitude for corporate "encouragement" of annuities should be done via clear rules, particularly in the area of company liability.

Besides the mandate and liability issues, employers will be worried about any additional costs they might face from incorporating annuities into pension offerings. Jody Strakosch, national director for MetLife's retirement products group, acknowledges that there may be corporate costs associated with establishingrecord-keeping platforms whereby corporate 401(k) managers such as Hewitt, Mercer and Vanguard increase their charges to reflect the additional cost of keeping up with the annuity portion of an individual's defined contribution plan.

But Strakosch doesn't think those costs would be substantial.

The Treasury, through the Internal Revenue Service, and Labor, through the Employee Benefits Security Administration, could conceivably change federal rules on either taxation and or ERISA without congressional action.

Modifications could be as simple as changing EBSA's Interpretative Bulletin 96-1, which details four general "safe harbors," pension-related areas that companies can educate employees about without straying into "investment advice" for which liability would be a concern. The Federal Register notice the two departments issued in conjunction with the RFI alluded to two ERISA Advisory Council reports issued in the past few years that endorsed the updating and expanding of 96-1 to respond to innovations in the financial marketplace as well as the baby boomer generation's move into the de-cumulation phase of their pensions.

Both Phyllis Borzi, assistant secretary at the EBSA, and Mark Iwry, deputy assistant Treasury secretary for retirement and health policy, have spoken publicly about wanting to encourage greater use of lifetime payments as part of pension plans.

"They have both told us that bigger changes will require legislation, but that this is the beginning of the process," says Ricard. "The chances of them moving forward on this are very high. The fact [that] you saw them working together on this detailed RFI -- which contained 39 questions -- this early in their tenure showed they are pretty invested in this."

Both Ricard and Robyn Credico, director of the plan-management group in North America for Towers Watson, say companies have included annuities in pension-plan offerings in the past, but that take-up has been minimal, and for a number of reasons. Those include the often-confusing nature of the policies, their cost, difficulty of comparing products and concern that a policy holder might die soon after buying an annuity, and the more recent concern, buoyed by the AIG headlines, that insurance companies could fold, making any annuities worthless.

Beyond those concerns, adds Credico, companies that listed annuities in their plan documents either didn't know how to deliver them or else had a hard time finding a provider. "Now we all decide that it is a good idea to put annuities back in pension plans," she says, chuckling. "It is like fashion, where the lengths of hemlines change."

Credico does note, however, that insurance companies have reworked their annuity offerings to respond to some employer/employee concerns. For example, some policies offer death benefits. In fact, MetLife and Prudential, among the major annuity providers to employers, have -- over the past half-decade -- offered a number of new annuity products with various wrinkles.

Strakosch points out that, when 401(k) plans became popular a few decades ago, some plan participants were confused about the differences in equity classes and how mutual funds work. She says the confusion about annuities is at that same point, and will be erased as companies and industries do a better job of educating and communicating with employees.

Comments on the RFI are due May 3, 2010; see:
http://www.regulations.gov/search/Regs/home.html#documentDetail?R=0900006480a898af


March 3, 2010